The FCL will reduce such needs for foreign reserves, since the IMF guarantees to lend them hundreds of billions of dollars when necessary"
suggest reading the following articles to help explain the above statements ~ Links to ASEAN+3 Chiang Mai Initiatve and Currency Swaps and *** Overinterpreting “Currency Swap Agreement”
August 31, 2010
IMF decision raises hopes for G20 summit in Seoul
IMF decision raises hopes for G20 summit in Seoul
A decision to expand a credit line program by the International Monetary Fund (IMF) raised hope in Seoul that November’s G20 summit will be able to bring tangible results on the reform of the global financial system.
The IMF announced Tuesday that it will expand and enhance its lending tool called the Flexible Credit Line (FCL), as well as establish a backup program called the Precautionary Credit Line (PCL). The announcement was a morale booster for the G20 Seoul Committee.
“This is the first visible result of the G20 Seoul Summit,” an official of the committee told reporters in a news briefing. “The mission of the Global Financial Safety Net is now half completed, and the IMF and G20 will come up with more ideas before the summit,” another official said.
Skepticism had been around over whether the Seoul G20 summit will bring about any meaningful results. A correspondent of a U.S. newspaper here had told The Korea Times that the G20 seems like “a group struggling to justify its importance and maybe even its existence.”
Tuesday’s IMF announcement is taken as a sign to erase doubts about the G20. Seoul’s preparation committee was credited for playing a key role. “The government of Korea has taken a leading role in advancing this issue,” the IMF’s press release said.
The revision indicates that the IMF is gradually shifting its mandate from the role of post-crisis bailout fund to the role of a pre-crisis prevention insurance fund.
Under the new scheme, the duration of the FCL is doubled to one year and it gives countries unlimited access to the fund. So far, countries applying for the FCL were only allowed to tap 10 times the amount of their fund commitment to the IMF.
Only countries that do not meet specific qualifications of the FCL will be subjected to the same loan limit, which is separately labeled as the PCL.
“The FCL can be described as a platinum membership credit card, and PCL is a gold membership,” the G20 official said.
The reform of the IMF has been a key issue at the G20 since the outbreak of the financial crisis in 2008. The fund has been criticized for failing to prevent a “spillover” of the crisis from the United States to other countries.
The G20 Seoul committee, hosting the summit in November, has taken the initiative in strengthening the role of the IMF under the slogan, Global Financial Safety Net. “It is a win-win situation for both Korea and the IMF. The IMF welcomes our efforts because the reform will give more power to them,” the Seoul official said.
The revised FCL scheme has the potential to bring fundamental changes to foreign exchange policies. Currently, many Asian countries such as China, India and South Korea are holding enormous amounts of U.S. dollars in reserve so they can use them in case of an economic crisis. The FCL will reduce such needs for foreign reserves, since the IMF guarantees to lend them hundreds of billions of dollars when necessary.
The FCL is especially appealing because it is cheap. Countries do not need to pay interest to the IMF unless they actually receive the fund. They only pay 0.6 percent of the credit line as a “commitment fee.”
“The 0.6 percent fee is nothing compared to the cost of holding foreign reserves,” the G20 official said. Countries may still want to keep their foreign reserves at a certain level but the FCL can be an attractive supplement, he said.
Not all G20 member nations appreciate the IMF reform. Germany was especially concerned that the expansion of the loan scheme may put countries in a moral hazard, the official said.
The G20 committee hopes that the IMF will introduce more reform plans before November. Issues being discussed now are primarily focused on measures to prevent the contagion of an economic crisis from country to country, he said.
The revamping of the voting quota and governance of the IMF are also key issues for the Seoul Summit.
http://www.koreatimes.co.kr/www/news/nation/2010/08/123_72329.html
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